CVB Financial Corp.
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Conference Call this morning to discuss CVB Financial Corporation and Community Bank's agreement to merge. My name is Anita and I'm your operator for today. At this time, all participants are in listen-only mode. [Operator Instructions] I will now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

[Christina Carrabino:]

Thank you, Anita. And good morning, everyone. Thank you for joining us today. With me on the call this morning from CVB Financial Corporation are Chris Myers, President and Chief Executive Officer, and Allen Nicholson, Executive Vice President and Chief Financial Officer; And Dave Misch, CEO of Community Bank. Our comments today will refer to the information that was included in the merger announcement released yesterday. To obtain a copy of the press release, please visit our website at www.cbbank.com and click on the Investors tab. We also will be showing a slide presentation on this call and to participate please go to the investor section of our website to listen to the webcast and download a copy of the presentation. Before we get started let me remind you that today's conference call will include some forward-looking statements. Page 2 of the slide presentation includes our disclosures on forward-looking statements that should be read in conjunction with this presentation. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. In addition, we wish to advise you that CVB will file with the SEC a registration statement on Form S4 that will include a joint proxy statement of CVBF and Community Bank and a prospectus of CVBF, as well as other relevant documents and information concerning the proposed transaction. Accordingly this presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities or solicitation of any vote or approval. Now I will turn the call over to Chris Myers.

[Chris Myers:]

Thank you, Christina. Welcome everyone. I appreciate you taking the time to join us on our call. If you'll --we're going to go through the slide presentation, and so if you'll turn to Page 4 of the slide presentation on the top it should say combination of historic Community Banks. And that's what this is; it's a combination of two historic community banks. Community bank goes back to 19454and it's been primarily organically built customer by customer, deposit by deposit and loan by loan for the past 74 years. CVB, Chino Valley Bank, now Citizens Business Bank goes back to 1974. Together we have almost 120 years of history. Community Bank is one of two banks left in Southern California that are primarily privately held that have been in existence over 70 years and have asset size over $3 billion. So the scarcity factor of this acquisition, this merger, if you will is very historic. We both stood the test of time. We went through the 80s recession and 90s recession in the 2008-09 recession whatever you want to call that. We have similar cultures. We compete against each other. We hire each other's people at times. We take each other's customers at times, but mostly we compete against the big banks. And so when someone-- customer looks at doing business with a bank in Southern California, a lot of times they'll look at some of the big banks but as an alternative they'll look at Community Bank or Citizens Business Bank or maybe a select a few other competitors. So we see each other in the marketplace quite a bit. The great part about this my --probably my favorite part about this acquisition is I'm going to be able to build an all-star team of employees, a much deeper bench. Skilled labor is hard to find in the banking world today. All the training programs have gone by the wayside from 25 years ago. They don't exist anymore. So for us to be able to deepen our bench and build an all-star team is very important to us we have an expanded product offering especially for Community Bank clients. Community Bank clients, we have Citizens Business Bank offers trust, trust custody, wealth management investment services. We also offer equipment leasing and citizen's home loans, home lending. All those products Community Bank does not offer to its customers today. So those customers at Community Bank are going to be able to enjoy those products and services. And we did not build any of these synergies on these revenue synergies into the model based on those cross sells. We're going to have enhanced asset mix. One of the great things about this is you know where the fact is that Community Bank has 96% loan to deposit ratio. So our strong deposits are going to be able to fund their strong loans. And finally geographic overlap. Community Bank is primarily in Los Angeles County and Orange County. And we're going to have tremendous geographic overlap, which I'll get to later in the presentation. And so we anticipate some strong cost synergies. Now please turn to page 5 of the presentation. The transaction rationale. Complimentary business banking models with similar core values and corporate cultures were two long-standing organizations that were started by two separate families back at least 45 years ago. We both have been through long cycles as I mentioned before. We're going to be about $12 billion in total assets pro-forma. We're going to get greater efficiency and scale through the combination of our two entities as we cross over the $10 billion dollar threshold. We love the fact that we're increasing deposit market share and geographic reach in key Southern California markets primarily Los Angeles and Orange County. Citizens have a lot of excess capital. We're going to be able to deploy that excess capital through our 80%, 20% structure. And we'll still be maintaining strong regulatory capital ratios. This is going to put our capital ratios right in the middle of our peer group, which is where we want to be. And we'll have strong earning power going forward to be able to build more organic capital. And we believe this is going to enhance our long-term shareholder value at CVBF. Turning to page 6 of the presentation. The overview of Citizens Business Bank CVD Financial Corporation, I won't go through this in detail. Many of you know our company, but we're founded in 1974, we're very proud of the fact that we have a 163 consecutive quarters of profitability, 51 locations throughout California. We're in both Southern and Central California. And we focus on small and medium-sized businesses and the business owners, and try to form long-term relationships that will stand the test of time. I point you to the financial highlights. Our return on average assets, if we adjusted for the deferred taxes revaluation at the end of the year was 1.42% for 2017. And our efficiency ratios running about 43%-44%. If you look at the efficiency ratio of Community Bank that's a good opportunity for us. Two great banks coming together. I'd now like to turn to page 7 and turn the presentation over to Dave Misch, who's going to talk about Community Bank. Dave?

[Dave Misch:]

Thanks Chris. And good morning, everybody. I'm just you know four or five key points that I'd like to highlight about Community Bank that I think are relevant to this transaction is first we were founded in 1945 as Chris mentioned by Charlie and Howard Cooke. Actually financed the sale of cement mixers which they owned back then. So we've been a family largely closely held business ever since that point, and so there are a lot of cultural things about our bank that are oriented that way. And that's similar to our Citizens Business Bank is as well having been founded by the board as many years ago. Second point that I think is relevant is since that time we have focused on serving small and medium-sized businesses, and adding value and helping those businesses accomplish things. Again, that's fits in very well with what systems business bank doesn't. You can see that from our statistics here almost 50% of our footings are you know C&I and owner-occupied real estate. Third point is Community Bank has been very conservatively managed over years. We are - we take deposits, we make loans, we don't have a lot of other stuff going on, get very good service. And I think this shows and our credit quality both of this past year and historical if you look back. And then the last points, we've had some good momentum in it last few years. In fact, last year loans grew 9.8%, DDAs grew12 %. So we haven't grown DDAs and deposits fast enough to keep up with our loan growth. And you can see from our loan and deposit ratio was 96%. That the merger with Citizens helps us in that regard. So, thank you, Chris, back to you.

[Chris Myers:]

Yes. And Dave is going to be available for Q&A at the end of the call here as well. So turn to page 8 if you will and we'll go through our growth strategy. And our growth strategy really doesn't change from what it was before. Citizens Business Bank will continue to grow in three ways. Same store sales, which is all of our branches we call them business financial centers. Their objective is to grow their loans deposits and fee income year-over-year. And then we grow through de novo and we create new offices by hiring new teams for their bank. And as you can see we've done five of those in the past three and a half years, two in San Diego one in Los Angeles, one in Oxnard, one in Santa Barbara. And then we have also a loan production office that we've opened up in Stockton in 2017. We plan to convert that over to a full-service branch within the next four to five months. And then finally acquisitions, if you look at a slide at the bottom, you can see the acquisitions we've done since February 2017. The one big difference here is scale, is size, the largest acquisition we've ever done is about $700 million in assets and that goes back to 2009 with San Joaquin Bank based in Bakersfield that was an FDIC assisted transaction, and they had five locations. This is a big deal for us $3.7 billion in assets, 16 locations. But the beauty of it is, it's right in our backyard, its right in the markets where we are. So that gives us a lot of comfort level, and being able to execute this plus are similar cultures. Turning to page 9, at the end of the day or at least at the time of merger, I guess if you will, we will be the eighth largest bank headquartered in California with over $12 billion in assets. Turning to page 10. Through this merger, we're going to get seven new locations; these are locations that are all existing within Community Bank right now. Santa Clarita, City of Commerce which is just east of downtown Los Angeles, Santa Fe Springs which is another 10-15 miles east of that. Huntington Beach, this is north of North Orange County. Century City which is West LA, and I'm extremely excited about West LA. I've been trying to get in that market hiring a team for a long time. We need to be in that market, we already have a lot of clients and prospects in the market. I think it's going to be fabulous for us. Burbank, we're in Burbank market but we're about three and a half miles away from their location, that's one of their biggest offices, so we're going to keep both those locations up because we just have simply too much of loans and deposits to deal with in one office. And then finally, Redlands, which is about 10-15 miles east of our easternmost office and it's kind of on your way to Palm Desert, it's a very affluent community in the in the Inland Empire. So these seven new locations are going to be added to the 51 locations that Citizens Business Bank to form 58 locations in total. If you turn to page 11, we have a substantial branch overlap. We have 9 locations that we have identified as potential consolidations and 8 of those 9 locations are within two and a half miles of each other, and if you actually looked at the first four on this list, both -- these offices you align them back and forth, they're on the same street. So we're just down the street from each other, right. So it really makes sense to consolidate these. We have not decided whether we're going to consolidate our office on any particular office into their office or vice versa, but we'll be making those decisions over the next couple months and communicating them accordingly. So we believe these 9 locations will all go in. I mean these 18 locations will all go in to nine locations eventually and we're really excited about that synergy and also blending the talented teams together and still kind of really adding the depth and to the personnel side of this two very, very important. Please turn to page 12. I'll show you a map. On page 12, we have a map where locations are. You can see that Citizens Business Bank, CVB Financial stretches from as far south as downtown San Diego to as far north as just north of Fresno in a town called Madera, what's not shown here is our loan production office which is up in Stockton, which is another 100 miles north of there. But you can see the density within the LA and Orange County markets. We're really excited about that. And the blue dots represent our new --those seven new locations I just talked about. Turning to page 13. I'm going to bring this over to Allen Nicholson, our CFO who's going to give you a transaction summary and talk about a lot of numbers. Allen?

[Allen Nicholson:]

Thanks, Chris. Merger consideration for the transaction is based on an 80/20 split of stock and cash consisting of approximately 30 million shares of CVB Financial issued to Community Bank based on a fixed exchange ratio of 9.4595 in cash of $56 per share or a $177.5 million in total. Based on Friday's closing stock price for CBB Financial of $23.37, the aggregate transaction value would be $878.3 million. Pro forma ownership upon close a merger would be 78.6% for CBB Financial shareholders and 21.4% for Community shareholders. One director from Community will be appointed to CVB Financials Board of Directors upon closed. We anticipate the merger closing early in the third quarter of after 2018 after customary regulatory and shareholder approvals. Now moving to page 14 looking at the transaction terms and assumptions. The estimated financial impact of the merger includes an initial cost savings of approximately $40 million or 50% Community Bank's non interest expenses. We've assumed no revenue enhancements in our projections but have identified some potential opportunities. Initial estimates assume a total fair market discount to Community's loan portfolio of 2% or $56.6 million based on a credit discount of 1.4% and an interest rate discount of 0.60%. A core deposit intangible is also estimated at 1.5% of non-maturity deposits, which is approximately $37 million. And finally transaction expenses are estimated to be $4 4million. Looking at multiples on page 15, the transaction valuation based on the fixed exchange ratio and CVB Financial closing stock price from Friday of $23.37, a 2.47x Community's tangible book value per share and represents a 21% core deposit premium. In terms of earnings multiple, the price is 26x Community's 2017 earnings when excluding their deferred tax revaluation charge. Based on the 80% stock, 20% cash financing the merger, 2018 EPS accretion is expected to be approximately 12%. And the internal rate of return is expected to exceed 15%. The initial tangible book value dilution is approximately 11% with an earn back of 4.9 years. As CVB Financial has excess capital, we elected to pay 20% of merger consideration in cash. On a pro forma basis, a combined company will have capital ratios that are consistent with their peers and will have a combined earnings potential to generate a significant amount of internal capital going forward. If the merger has been 100% stock deal, the tangible book value dilution would have been approximately 2% with a 1.6 year earned back. Moving to page 16, looking at profitability and capital. Profitability post merger and consolidation is estimated by the fourth quarter of 2019 to generate annualized return on average assets of 1.6%. And a pro forma return on average tangible common equity of 17%. On the bottom here you also see that pro forma capital levels estimated closed continue to be well within our peer capital levels with a leverage ratio of 9.6%, and a total risk-based capital ratio of 13%. I'll now turn it back to Chris.

[Chris Myers:]

Thanks, Allen. So let's go to page 17 and talk about business integration opportunity. When we look at here, one of the things that we saw through the due diligence they don't --Community has a lot of long-term customers. They're been doing business for a long time, and that's very compelling for us. They're organically grown. I think this is a different story that a bank that maybe was formed 10 years ago by raising capital and then did multiple, multiple mergers to put it together. This is a different story. This is an organically grown Bank and as such they have a strong C&I lending culture. They haven't had to develop this lending culture over the last five years; they've had it for the last seven years. And we've both been our communities a long time. It's funny the nonprofit's that we both share and we both do stuff in the marketplace, and we were looking at some of those, and I won't mention any names but so-- it's going be nice because some of the donations I think I'll be able to give a little overlap on. So we'll see about that maybe a lot to just continued. Balance sheet and capital. We've got strong synergies along the way, our deposit strength; their loan strength relationship based lending is gets into our kind of our core objectives of the company. We want to -- we want to build long-term relationships not just transactions. And pro forma earnings, when you talk about a 1.6%. Capital I mean 16% return on average assets. So let's does some quick math at 1.6% return on average assets and if we're over $12 billion in assets coming into later in the year 2018, coming into 2019. That's about $200 million in annual earnings. Well, we have 140 million-ish pro forma shares and we'll be paying a $0.14 dividend, that's what our dividend is right now. And total is a little over $80 million a year. If we can make $200 million a year and are paying out a little over $80 million in dividends, I do think there's room for us to increase their dividend because I simply don't need $120 million of organic capital every year created to fund a $12 billion an asset company. That would mean 10% organic growth and organic growth rates probably going to come out it's somewhere between 6% and 8%. So I do think there's an opportunity to increase our dividend once we get this deal all put together and historically I think we're very comfortable with that 50% to 55% dividend payout ratio. Certainly that's going to be up to the board at that time. So no promises but at the same time I really believe that's a really compelling part of this deal is that I do think there's a dividend increased potential in the future and not just a long-term future. We've talked about operations and personnel all-star team of Citizens Business Bank and Community Bank associates. The other thing is systems integration. We're both on the same core processor which is Pfizer. Now there are little subtleties to how that runs and we'll have to adjust for those but it's a lot better than being on two different systems. So that's going to be a lot less rigorous for our people and for our customers in terms of any disconnects. Community Bank and Citizens Business Bank which will enjoy expanded products and service capabilities and distribution for the seven new locations and in Community's case it'll be 35 new locations and really this is a great opportunity to optimize our balance sheet to right-size our balance sheet in terms of capital, loan to deposit ratio, funding et cetera. Turning to page 18, crossing the $10 billion threshold. And so about a year ago little less I formed a team saying, you know, what are we going do to prepare for crossing the $10 billion threshold. So we've been working on this already. This deal is going to accelerate our plan; one-time costs are expected to be about $2 million to $3 million. We expect to have recurring expenses over $3 million to $4 million a year. And the lost revenue to the Durbin amendment is expected to be to $1 million to $1.5 million per year. Most of that is Citizens Business Bank, only a small portion of that is Community Bank. And as you can see below these are some of the areas that will focus on between the regulatory requirements and supervision. We've identified this. We have some of our senior executives leading a $10 billion internal committee within the bank and we're off and running on that. We anticipate that if we will close in as scheduled in July of August of 2018, we will not be subject to the $10 billion. Many of us $10 billion threshold requirements until the first quarter of 2018. Is that correct now?

[Dave Misch:]

The DFAS reporting will be 2021.

[Chris Myers:]

2021, okay.

[Dave Misch:]

Based on becoming a covered bank somewhere in the second and third quarter of 2019.

[Chris Myers:]

Okay, got it, all right. Turning to page 19. I want to go through some of the loans by geography because the Citizens always been very strong, strongly represented in the Inland Empire and as you can see this really puts us a lot more emphasis in LA County not that there's any DM emphasis on the Inland Empire, but we'll have four markets that are basically $ 1 billion in loans or more stretching Orange County a little bit from $944 million, if you look at the right side here. But LA County's $3.4 billion in loans or 45% of our total loans of in the bank. Turning to page 20, deposits by geography. Between the two of us and we include our repurchase agreements here repos are basically a customer sweep that we have that goes into an overnight investment, which is really funding for us as the average cost of those repos is about 25 basis points for us. So those are commercial deposits where we might have a large commercial deposit and we sweep overnight, we put a peg balance and they're usually a few million dollars and then we sweep everything into that customer repurchase agreement. So it truly is a deposit shows us a borrowing of about $600 million, but it's our deposit. So between the two of those we are about $10 billion in deposits of which percent 36% in LA County, 26% in Inland Empire and then Orange County represented by 14.7% and Central Valley 12.5%. So very strong deposit concentrations almost based within a bank and each of those counties and locations. Turning to page 21, this is the asset composition and I will focus you all the way to the right pie chart here, at $12 billion in assets we're projecting there will be at 63%, 33% securities and 4% other assets. CVB by itself was 58 and 37 before. Turning to page 22, loan composition, it really helps us here is if you look at the left chart, the left pie chart, you can see that CVB between C&I and owner-occupied commercial real estate is 44% of our loans. And yet we have 70% of our loans in commercial real estate. So you go all the way to the right, you can see the pro forma but let's take a look at Community Bank in the middle. If you look at their C&I and owner-occupied they're 59% is C&I and owner-occupied, yes, they too have 70% of the loans in commercial real estate. So we both have 70% of our loans in commercial real estate. They just proportionally have a greater amount in owner-occupied than we do, and we both share the same or similar concentrations in C&I. On a pro forma basis, it really comes out the same way except we have a lot higher concentration about 50% of our loans in C&I and owner-occupied. Total of gross loans projected at $7.6 billion where they were at close at 12/31/2017. In terms of deposits, I think the reverse is true where Community Bank kind of helped us in the C&I portion and the owner occupied. CVB helps Community Bank a lot in the funding side with stronger non-interest bearing deposits on a consolidated basis will still have 53% of our deposits will be non-interest bearing 33% money market savings, now another 5%. So really you are up 91% of our deposits are in non -time deposits, so very strong core deposits, and this shows you $9.4 billion here until deposits. Don't forget that we have about $600 million in those customer repurchase agreements. So really like a money market. Turning to page 24. I want to talk to you about our critical view. At our Leadership Conference at the bank last week I rolled out our critical view to the bank, and I've changed one of those which is the third bullet point down because I couldn't tell my leadership team that we were buying Community Bank. But I did say execute on potential acquisitions and now we put an acquisition name in there. But our objective of our consolidated company is to grow loans through relationship banking strategy, grow our core deposits, execute it on Community Bank integration, making sure our teams come together, shareholders, our expenses everything comes together smoothly. Prepare for the $10 billion and beyond and then I think the big word of the day here is fraud prevention. And we need to make sure that we're watching our customers' backside and our own backside. And so before I get to the questions, I'd like to communicate the following just kind of a wrap up. We worked hard on our due diligence for this acquisition on both loan and deposit side. We reviewed credit files totaling 70% of total loan outstanding. We also reviewed all business deposit account relationships that are analyzed and have total deposits of $1 million or more. We mapped their products and services into our deposit system to analyze profitability. This totaled about a 175 deposit relationships. I am truly excited about this merger because it adds depth and talent to my banking team. We plan to interview all Community Bank associates and make the best personnel decision on a case-by-case basis again. Again, I refer this to as our all-star team approach. This merger will add seven new locations in sub markets where we have no physical presence. This merger will combine CVB's strong deposit and funding strength with enhanced business lending capabilities. It will also allow CVB to cross the $10 billion threshold with some scale as pro forma total assets around $12 billion. And again, I reiterate my personal goal is to achieve a 1.60 return on average assets no later than the fourth quarter of 2019 post integration. Now Allen, Dave and I are happy to answer any questions that you might have.

[Operator:]

[Operator Instructions] The question today comes from Aaron Deer with Sandler O'Neill. Please go ahead.

[Aaron Deer:]

Hi, good morning. Guys and congratulations on the deal. So I guess starting with on the revenue side, if you suggested some revenue enhancements are possible, but not included in your metrics. Just wondering if you could maybe give us a sense of where you see the best opportunity in terms of -- is that in greater lending capacity, wealth management, trust leasing or kind of where do you see that going ? And does this affect your growth outlook at all? I guess over the past year or so you've kind of talked about 8% annualized growth as a combined company. Do you expect that it's -- you're going to run it about that same kind of growth pace or could it be a little better or where do you see on that front?

[Chris Myers:]

I think good question, I think that 6% to 8% organic growth is kind of the combined objective, but a lot of --and I'm talking about more of deposit and loan growth there. We are both institutions that focus, our focus is on what we do. We don't get into a lot of new things. We focus on what we're really good at and continue to execute and continue to take market share in our various markets. So I do think these revenue synergies and you mentioned them all right there about the wealth management, investment services, trust, trust custody our home loan program and equipment leasing. These are all new things to Community Bank and we're going to have to get in there and train them, train their people on how to sell those or help us assist in selling those. And it's really more arrows in the quiver for their team to be able to cross sell more products. We have not built those revenue synergies in here but we do think there'll be substantial overtime, but it's not something that we're going to be able to put in the first six months of the deal. It's going to take some time to get through those, but it's about our whole strategy of capturing the economic wallet of our clients that are small and medium-sized businesses, and the business owners. And providing a lot of service.

[Dave Misch:]

If I could add there. This Dave Misch from Community Bank, two areas which I think would be very helpful for us our first trustee mortgages. We've tried a couple times to pull that off not very successfully. There's a big demand among our client base, our prospects and our distribution network for that, and the other thing that would that's appealing to us is the trust business, just a custody that factor. There's a lot of people that sell their businesses, transitioning from people that pass way down to children, and that could be very helpful for us as well, to very specific.

[Operator:]

The next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

[Matthew Clark:]

Hi, good morning. Wondering if there's anything you need to do with Community Bank's balance sheet if there's anything you need to rework and kind of what the underlying assumptions are around any attrition if it again if any?

[Chris Myers:]

Yes. I think that certainly with our strong funding we are going to be looking at their borrowings and look at their higher price deposits, and making business decisions along the way. We want to -- a lot of that will also depend on our organic growth. And I'll quickly begin after our organic growth. I think once we get settled through 2018 and get through 2019, I think we're going to be firing on all cylinders. And I'm hoping that our growth rates can be very strong there. And if that's the case, we'll take a look at those deposits and how much we need them or don't. But one of the things that, I tell this story and I told this story to the Community Bank board and the executives. When I joined CVBF in 2016, late 2006, I joined a fantastic company. And I look at Community Bank as a fantastic company. CVB's financial metrics were stronger than Community Bank's are right now. They were always an industry leader and so forth. But CVB I've had some things that I personally felt were vulnerable going into the marketplace today. And that was they were about 98% loan to deposit ratio back then. They had $2.1 billion dollars in federal home loan bank debt which was funding $2.6 billion in investments or partially funding that. And so we were $6 billion in assets when I joined the company, but we're really $4 billion assets because all we did is borrow $2.1 billion from the Federal Home Loan Bank and buy securities. Well, today you can't really do that and have positive margin and positive operating leverage. So back then I embarked on a mission and that was to really strengthen the core deposits of this company. And we've done that. We paid back all of our $2.1 billion in federal home loan bank debt by growing deposits. We increased our non-interest bearing deposits from about 38%-39% to 58%-59% over that 10 year period of time. And so today I look at Community Bank almost in a similar analogy if you will. I look at their strengths as being their good credit funding. They're great customers, but I look at their weakness is too strong a word but I look at an area that we can take our tremendous strength on the funding side, and start firing all cylinders. And so I'm mobilizing my deposit teams, we're getting after it and we're going to go ahead and grow our deposits in a strong way. So I want to make sure that I'm tempering the expectations from investors but my objective here is to get really back on the core deposit train here and drive core deposits to replace some of what I will call non core funding that exists in Community Bank. The good news is I think about $2.2 billion - $2.3 billion is pretty good core funding at Community Bank. The rest of it I think is subject to replacement with our deposit growth. And Allen I don't know you have anything to add to that.

[Allen Nicholson:]

No, I think it's including the debt they have I think over time we'll be able to replace that with lower cost funding. And a few business days, if you watch we've done that last three or four years, that's exactly what we've done is tried to replace Federal Home Loan Bank borrowings with low-cost deposits. Again, we just embark on this journey. So we didn't quite make it but we are headed in the same direction.

[Chris Myers:]

And Community also has organic growth than we did last year and we had liked over 9% organic growth in your loan side. And CVB was about half of that.

[Matthew Clark:]

Great and then on the expense step up for crossing $10 billion, the $3 million to $4 million of recurring expenses, the anticipate will continue I guess can you talk to what's embedded in those numbers and I guess what level of confidence you have that's enough now that you're quickly crossing $10 billion?

[Allen Nicholson:]

Yes. We have a high level of confidence in those estimates. We've done a lot of planning at this point. For the most part you're going to -- we are going to incur expenses related to people potentially third-party vendors as well as some software, but certainly from a people perspective, as well as certain outside vendors that we need to sort of support those new people on some of the work we do will be needed.

[Matthew Clark:]

Okay and then just last one for me looks like Community Bank CRA rating needs a little bit of improvement. I guess what needs to be done to remedy that and assume that's the only kind of regulatory issue but just want to double check.

[Chris Myers:]

Yes. And we're very obviously very much aware of that and instead Community's been working on that pretty hard for the last year. And I know and I'm going have Dave talk about that in a second, but I do want to let you guys know that I did go up and meet with the regulatory agencies with our Chairman and the Chairman of Community and Dave Misch and sat down with regulators last week and discussed this with them. And we are putting together a comprehensive plan to address the CRA issues. We already have at Citizens Business Bank and I know that Dave's been working on this for about a year now almost right. So we're happy here since last year.

[Dave Misch:]

So last year while we got our needs improvement we bulked up that area and there's a very public plan out there that you can go to review in terms of where we've set up some our objectives in terms of loans to companies with less than -- with revenues of less than a $1 million. We've staffed up to target that area we've created special products to lend it to that area so you know we've been very aggressive and proactive it kind of getting after that and making sure it's going forward.

[Chris Myers:]

We're going to take their plan and our plan and put them together and have one comprehensive plan that we think is suitable for a $ 12 billion an asset company and make sure that we're checking and balancing that with our regulators.

[Dave Misch:]

And I would say implicit in the critical few in terms of integrating Community Bank are exactly does it show.

[Operator:]

The next question comes from Jackie Bohlen with KBW. Please go ahead.

[Jackie Bohlen:]

Hi, good morning, everyone. Does the tax rate outlook change at all with the addition of Community?

[Allen Nicholson:]

Modestly but I think we have some opportunities to once we're fully consolidated to see our self still in the same range we talked about in our last earnings call.

[Jackie Bohlen:]

Okay. So still 27% and 29%.

[Allen Nicholson:]

Yes. I mean it's probably to 28% to 29% with the merger.

[Jackie Bohlen:]

Okay and the $10 billion expenses, I know it's very small relative to everything else but has any of those expenses already been incurred or are ongoing are those incrementally new costs that were laid out in the presentation?

[Allen Nicholson:]

Those are generally marginal increases on top of what we've already started to spend.

[Jackie Bohlen:]

Okay and then just lastly as you think about the shifting composition and the deposit book in the loan book more towards LA and everything else. How do you think about where you'd like to see yourself geographically in the next three to five years?

[Chris Myers:]

Yes. I think, look, we started in the Inland Empire 197 and we have a lot of great clients here and have a great foundation here and Community Bank is an LA County based bank. So I think for the time being it's really not on our mind to change headquarters any way shape or form, but we'll have to look at that going forward but right now we feel like we've got just tremendous almost hubs if you will in Ontario, which is an Inland Empire and Pasadena is which is where Community is. And also down in South Orange County under that Newport Beach area. We have a lot of resources down there as well. So we feel like we've got that we got a triangle there of Southern California or at least the greater LA County Orange County, Inland Empire area and those so it's all three hubs for us. So we kind of you know have some really key people on all those locations.

[Jackie Bohlen:]

Okay and then as you think about time you had mentioned that the LPO up in Stockton will change into a branch do you see any de novo infill between gaps within the footprint that you might have up there?

[Chris Myers:]

Yes, I think eventually we will, I think that we got an opportunity to hire some people that we thought were pretty strong out of a major bank and so we kind of said alright prove it will give you an LPO, see what you can bring in and they've been cranking some pretty good business. So we've -- so they pass test number one. And then go into a business financial center deposit-taking Center is test number two. So as we do that I think we would look to backfill in places like maybe Merced or Modesto and that kind of close the gap between that Fresno Madera area and Stockton. And ultimately we hope to do that and then get up to Northern California, Sacramento eventually but I think for now we got our hands full with integrating Community Bank for 2018 and that's going to be our main objective.

[Operator:]

The next question comes from Brian Zabora with Hovde Group. Please go ahead.

[Brian Zabora:]

Good morning, a question on the accretion estimate of 12% for 2019. Are you including that additional cost for crossing $10 billion dollars in that estimate and also you talked about the potential for maybe remixing some of the funding cost? Is there any part of that or are you assuming any of that in that accretion number as well?

[Allen Nicholson:]

Brian, we are not including any of what I would call revenue synergies both from funding mix perspective or income opportunities nor will be including any of the additional expense of going over $10 billion since we would incur that regardless.

[Brian Zabora:]

Understood and then just a question on the CRA rating. Will you need an upgrade to be to close those branches or will that impact the branch closing timing at all?

[Chris Myers:]

Obviously don't know that question right and don't know the answer to that question, it wasn't specifically been addressed but we believe that we're going to put a program together and execute on that program and there's no reason why we wouldn't believe that we'll be able to stick to our schedule. But we have a plan and we're going to execute that plan and the plan is to consolidate that offices in late in 2018 and very early 2019.

[Brian Zabora:]

Okay, great and then just lastly you mention about capital and building levels up. Ultimately where would you like those capital levels to be? Do you want to stay maybe I guess which capital ratio you're more focused on and where would you like to be kind of down the road?

[Chris Myers:]

Well and I'll let Allen jump in here as well. We look at our capital ratios and kind of the tier one leverage ratio and we've been running over 11% on that for some time now. We'll come back into the low 9 -9.25 percent-ish through this deal. We feel very comfortable operating at that level. I think that's plenty of capital for a company like ours that is conservatively run; has a great tradition of profitability and I think Community shares that same culture and same kind of accomplishment. As far as total risk-based capital, we're going down for like 17 or 18 down to 13 and quarter-ish. Is that right Allen?

[Allen Nicholson:]

Correct.

[Chris Myers:]

And I think we're so comfortable that level as well. So I think these capital levels were going to is probably where we're meant to be on an ongoing basis. So any capital we build up that I think would be excess capital especially when this all goes back to 2008 when we took $130 million in tarp raised $130 million to repay to tarp. I think we were the third bank in the United States that repaid tarp because we took it and we decided to be we didn't need it. And raise capital do that so that $130 million has been embedded in this company for a long time as excess capital, and building more through profitability. And now we've been able to put $175 million - $180 million of that cash to use to decrease our capital levels by doing 20% of cash in the deal and that's why we did it. We want to put -- we want to run as normal capital levels. And I think on pro forma basis you're going to see us our return on average equity coming up over 17 if the projections go right in late 2019j. Is that right Allen?

[Allen Nicholson:]

That's correct.

[Operator:]

The next question comes from David Chiaverini with Wedbush.Please go ahead.

[David Chiaverini:]

Hi, thanks. Question on timing, so you mentioned closing the transaction as early as July, but do you have any concern about regulators being possibly more reluctant to approve the deal as quickly as they normally would since you'll be crossing over $10 billion?

[Chris Myers:]

Well, you always have concerns about that but I don't know why they would. You're talking about two organizations that are very strong from the safety and soundness perspective. You're talking about two organizations that have been profitable for a long time. And you're talking about two organizations that have 120 years of history. And then finally, you're talking about two organizations that take their deposits and lend it in the same markets that they're in. Over 95% of our loans are in our geographic deposit market, not many of the banks our size can say that in Southern California. We're one of the few that really is a true relationship bank that's deploying our loans into the same markets that we're in. And when you look at the CRA and a thing like that, I think that's one of the big concepts here that we're going to be driving home with them is. Look, we're not taking these deposits and doing a national lending strategy and lending these things out all over the country. We're putting them back in into our economy right here in Southern and Central California. And so I'm hoping that resonates and we were on time for July in August and that's the plan.

[David Chiaverini:]

Great. And then shifting over to the consideration of 80% stock 20% cash when looking on slide 15 and showing that the book value dilution, the tangible book value dilution would have been 2% and the earn back at 1.6 years under a 100% stock. Why not do a 100% stock? Was it as a Community Bank Board wanted portion cash or was it CVBF wanted the cash to have a higher accretion level?

[Allen Nicholson:]

Well you know as we talked about earlier, we've been carrying what we view is excess capital for some time and our analysis of how to deploy that. How else would we deploy that buyback shares, buying back shares would have had a much longer earned back. So we view that as they really financially the best use for capital from an acquisition like this. And bringing us back to where we thought our appropriate capital levels were.

[Dave Misch:]

And this is Dave. I would say that we were not totally indifferent but fairly indifferent between those options. We think Citizens Bank is a great stock to hold. So I think that's the actual real reason why it was done this way, it's a capital optimization.

[David Chiaverini:]

Great and then last one for me does your net interest margin sensitivity change at all post-closing?

[Allen Nicholson:]

Not significantly, the composition of Community's assets are probably a little more asset sensitive than Citizens and their liabilities are also probably little more sensitive but once the consolidation occurs, I don't expect a significant change to our overall assets sensitivity.

[Operator:]

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

[Gary Tenner:]

Good morning. I just wanted to ask about the long growth outlook again here I think Dave mentioned that Community loans grew by about 9.8% last year. Chris you talked about kind of a 6% to 8% loan rate that you --and 8% number for you have been a bit aspirational in recent years from an organic perspective. Is there anything in terms of the lending, the underwriting or anything that you think would result in us in a slowdown in the pace of growth at the Community Bank portfolio or franchise as you go further?

[Chris Myers:]

I want to get Dave's opinion on that but mine is not, I think if anything we should be able to keep producing especially with the new product of Citizens home loans coming into the fray, and so I think that's going to help us along the way. We've got to get completely under the $10 billion and look at everything and a lot of the processes that Community Bank uses on the credit side in terms of the way they process their credit. We're going to integrate some of those into Citizens Business Bank to make sure that we keep the pipeline flowing and so forth. And but I don't know I can't think of anything Dave, can you?

[Dave Misch:]

I'm not sure how much more from the $10 billion you all need to go. I mean I'm joking and I'm not Citizens did extremely thorough due diligence. I think you looked at every exposure above million and half, pretty significant. So I think they were very pleased with what they saw. So I mean I think that's kind of stuff you want look going forward. And I think if we implement the processes and Chris alluded to. We shouldn't have an issue which using similar growth.

[Gary Tenner:]

Great, I don't know if you had mentioned this but Dave will you be remaining at the buying company and in what capacity?

[Dave Misch:]

No. I won't be remaining at the existing company but that's more of a personal thing. Honestly, I have some elderly family and I need to take care of and that's really kind of be my focus going forward so.

[Gary Tenner:]

Okay, thanks. And then just one last quick question on the CVI, what would the amortization be there in terms of the number of years and method?

[Allen Nicholson:]

It will be similar to what we've done in our past acquisitions. Gary. I don't know - I can follow up with you. I don't have that in my fingertips so.

[Operator:]

The next question comes from Don Worthington with Raymond James. Please go ahead.

[Don Worthington:]

Thank you, good morning. There's a couple things for really I guess my own clarification in terms of the one-time costs related to the $10 billion and $2 million to $3 million, is that over and above the one-time merger costs?

[Allen Nicholson:]

That would be correct, it's not included in those merger costs.

[Don Worthington:]

Okay and then just maybe more clarification on the timing the Durbin impact would that be mid 2019?

[Allen Nicholson:]

Approximately assuming the close occurs in the third quarter of this year.

[Don Worthington:]

Yes so you'd have the $10 billion at the end of this year. Okay and then I didn't see it in the slides but any expectation of goodwill being booked?

[Allen Nicholson:]

In terms of what the total goodwill would be you mean?

[Don Worthington:]

Yes.

[Allen Nicholson:]

Yes, well certainly now I can follow up with you Don as well on that. I don't have that exact number at my fingertips.

[Operator:]

The next question comes is a follow-up from Jackie Bohlen with KBW. Please go ahead.

[Jackie Bohlen:]

Hi, just one last quick one and given the different dividend schedules at the two banks, is there any thought on how those might converge just until close, if at all?

[Chris Myers:]

I'm sorry question is a dividend is pre closed or after close?

[Jackie Bohlen:]

I guess both pre closed and after closed since both Community and CVB are on different dividend declaration schedule so how that might potentially be handled?

[Chris Myers:]

Yes. Citizens CBBF dividend is obviously subject to board meetings and going forward we're paying $0.14 a share. I would not anticipate any change between at that $0.14 a share between now and close. But that again that goes before the board every quarter and we talk about that. But I would not anticipate any change there and I know Community is paying a dividend based in the first quarter of 2018 and I don't think they're paying any dividends after. Is that right?

[Allen Nicholson:]

$0.50 share I think is what we --

[Chris Myers:]

Yes. $0.50 a share and so the shareholders of Community Bank are going to receive a significant dividend increase assuming that we all go to $0.14 a share post close.

[Jackie Bohlen:]

Okay so the current 1Q dividend then a pause until the close and then they'll get on the CVBF schedule at that point having with the dividend and then all the other language you spoke about earlier in the call?

[Chris Myers:]

That’s correct.

[Operator:]

And there appears to be no questions, this concludes our question and answer session. I would like to turn the conference back over to Chris Myers for any closing remarks.

[Chris Myers:]

Hey, thank you everyone for joining us today. We're very excited about this merger agreement with Community Bank. We believe our combined forces will provide us with a tremendous financial opportunity in terms of depth of talent, a strong and diverse customer base, and significant geographic overlap. Thank you for participating. And have a great day.

[Operator:]

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.